Which two transactions decrease owner's equity?

Which two transactions decrease owner's equity?

• A. Owner investment and revenues
• B. Owner withdrawals and expenses
• C. Revenues and expenses
• D. Withdrawals and investments

Answer: (B)

Owner's equity changes based on what the business does with its resources: revenues and investments typically increase it, while expenses and withdrawals decrease it. Expensing costs reduces net income, which lowers retained earnings and thus reduces equity. Withdrawals take assets out of the business for the owner, directly lowering the owner’s stake in the company. So the two actions that decrease owner's equity are expenses and owner withdrawals. Investments and revenues do not fit because they raise, not lower, equity.

Owner's equity changes based on what the business does with its resources: revenues and investments typically increase it, while expenses and withdrawals decrease it. Expensing costs reduces net income, which lowers retained earnings and thus reduces equity. Withdrawals take assets out of the business for the owner, directly lowering the owner’s stake in the company. So the two actions that decrease owner's equity are expenses and owner withdrawals. Investments and revenues do not fit because they raise, not lower, equity.